Prepared by the IMF African Department, and published twice a year in English and French, Regional Economic Outlook: Sub-Saharan Africa analyzes the macroeconomic performance and short-term prospects of sub-Saharan Africa and provides and in-depth analysis of selected topics. The April 2009 Outlook includes two chapters: one on the macroeconomic impact of the global financial crisis on sub-Saharan Africa, and the other on the impact of the crisis on financial systems in the region. Detailed country data are provided in a statistical appendix.

In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.

An en-dash (–) between years or months (for example, 2005–06 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).

Main Messages

Global Financial Crisis Hits Sub-Saharan Africa

Over the past decade sub-Saharan Africa has made remarkable gains in promoting growth and achieving economic stability. Growth—which is essential for much-needed poverty reduction—averaged more than 6 percent over the past five years; inflation had fallen to single-digit levels before the fuel and food price shocks of 2008; and reserves were built up. These positive developments relied on strong economic policies; a favorable external environment, especially rising commodity prices; and debt relief and aid from the international community.

These hard-won economic gains are now at risk. Like the rest of the world, Africa is feeling the impact of the global financial crisis. Demand for African exports has fallen; commodity prices have declined; and remittance flows may be weakening. Tighter global credit and investor risk aversion have led portfolio flows to reverse, deterred foreign direct investment (FDI), and made trade finance more costly. The economic slowdown is also likely to increase credit risk and nonperforming assets, weakening the balance sheets of financial institutions and corporations.

The appropriate policy response depends on country-specific circumstances. The priority for all sub-Saharan African countries, however, must be to contain the adverse impact of the crisis on economic growth and poverty, while preserving the hard-won gains of recent years, including macroeconomic stability and debt sustainability. Temptations to respond to weakening balance of payments positions with protectionist measures or by reverting to administrative controls need to be avoided. Economic policy through these difficult times should therefore be guided by the following principles:

Use available fiscal space. The global financial crisis will reduce government revenues. If the increase in the fiscal deficit can be financed, countries that achieved macroeconomic stability without binding debt sustainability constraints have scope for letting automatic stabilizers work. A few countries also have scope for discretionary fiscal stimulus, including social measures to protect the poor. Commodity exporters that accumulated savings during the boom may be able to adjust gradually by drawing down reserves. For those with fewer reserves, additional donor support will be needed to ease the adjustment. Eventually, however, all countries need to adjust to the new external environment.

Where possible, ease monetary policy and let the exchange rate adjust to the external environment. The plunge in commodity prices should provide a disinflationary impulse, which might allow some countries to ease monetary policy. Where the terms of trade have deteriorated or capital flows are drying up, real exchange rates will have to depreciate. For countries with flexible exchange rates, currencies should be allowed to depreciate, whereas for countries with fixed exchange rates, fiscal policy is the main instrument, along with measures to enhance competitiveness. Countries with a de facto rather than a formal peg could consider introducing some degree of flexibility.

Closely monitor financial vulnerabilities and be prepared to act promptly. Determined risk-based bank supervision will be essential for identifying and addressing banking system vulnerabilities at an early stage.

Keep medium-term goals in sight. Fiscal measures in particular need to consider debt sustainability issues and support development strategies.

To carry forward the reform momentum of the past decade in the current adverse environment, Africa will need additional aid resources, at least the doubling of aid promised by the G-8 Heads of State at the Gleneagles summit in 2005. Although donor countries are also under pressure, aid commitments should still be honored: without additional donor support, the necessary large expenditure cuts could set poverty reduction and infrastructure provision in Africa back by several years and might even endanger political stability in some countries. In addition, aid constitutes a small share of donor countries’ budgets. The IMF is doing its part to help Africa. It is revising its lending instruments to make them more flexible and working to double concessional lending to low-income countries. The Fund will also continue to provide policy advice and extensive technical assistance to strengthen economic policymaking in sub-Saharan African countries.

Impact on Financial Systems

Financial systems in sub-Saharan African countries have so far been resilient to the global financial crisis. Although the crisis has exerted significant pressures on money, currency, and capital markets, they have continued to function normally. The relative stability reflects several factors—among them the limited, though increasing, integration with global financial markets, minimal exposure to complex financial instruments, relatively high bank liquidity, limited reliance on foreign funding, and low leverage in financial institutions.

However, pressures have intensified as sub-Saharan African countries are being hit by the global crisis. The spiraling effects of a depressed world economy and the increased risk aversion of investors pose growing risks for financial systems. Because of the spillover of the crisis to real economies, global demand and prices for commodities are depressed, capital flows are declining, and economic growth prospects have slowed throughout the region. If prolonged, this situation could further increase credit risk and nonperforming loans and reduce liquidity. In particular, with external resources drying up, domestic markets might be too thin to accommodate the demand for credit from both the government and the private sector.

What can sub-Saharan African countries do to protect their financial systems and their reform achievements? Priorities may have to emphasize short-term preventive measures to minimize contagion. Crisis resolution tools will be needed to mitigate the impact of the global financial crisis. Useful measures would be intensified surveillance to facilitate early detection of risks (e.g., through stress-testing of banks); contingency planning to reduce potential runs on banks and protect depositors; improved arrangements for home and host country supervisory relations and cross-border crisis management; flexible provision of liquidity support to the banking system; and strengthened bank resolution frameworks to ensure the orderly exit of weak banks.

Short-term priorities, however, should not detract governments from the need for longer-term reforms to build and diversify their financial systems. Reforms should aim to better regulate financial systems and address regulatory gaps, particularly weak cross-border supervision; tackle weaknesses in the legal and financial infrastructure; further promote capital markets; and deal with data deficiencies in risk-monitoring systems.

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